My Big Tax Break Looks a Lot Like Your Big Spending: Ezra Klein

By Ezra Klein -
Jul 20, 2011

I spent time digging through the
federal budget this week, and I concluded that Republicans are
right: There is plenty of spending to cut. For instance, we’ve
got one government program that hands people money to buy houses
that, in most cases, they would buy anyway. They get even more
money if they buy a more expensive house. Over the next five
years, that program alone will cost almost $500 billion.

Another federal agency will spend more than $400 billion to
reward people for making money by investing and earning capital
gains and dividends rather than by going to work and taking
their income in wages. I like investors and I participate in the
market, but is this really the sort of activity that requires a
$400 billion subsidy?

Here’s one I can’t figure out: Why are we sending checks to
employers who subsidize their workers’ transportation costs? Is
there some reason we want transportation to be included in an
employee’s compensation package? Do we want it to the tune of
more than $20 billion between now and 2015?

And did you know that every time someone makes a charitable
donation, the federal government transfers money into the
donor’s bank account? Supporting shelters and museums and
Doctors Without Borders is a good deed and all, but is it really
something that taxpayers should reward with more than $200
billion in cold, hard cash?

More Subsidies

There is tons of this stuff. The government pays employers
$700 billion annually to offer health insurance to their
employees, which no economist would say is a good idea. We’re
subsidizing select parts of the energy sector, spending almost
$2 billion, for instance, to subsidize “open-loop biomass”
rather than simply pricing carbon emissions and letting the
market work out the details, and we’re handing $4 billion a year
to oil and gas companies that explore for new reserves.

Midway through my excavation, however, when I was really
just getting warmed up, I realized I had made a mistake. I
wasn’t looking at the federal budget: I was looking at the U.S.
tax code. So cutting all these costly programs wouldn’t count as
cutting spending to Republicans in Washington. It would count as
raising taxes.

All those programs are tucked in the tax code, classified
as “tax expenditures.” Like traditional government spending, the
point is to achieve specific ends by throwing money at a
problem. The only difference is that the beneficiaries don’t
receive checks from the government, they simply have their tax
liabilities reduced. The Center on Budget and Policy Priorities
estimates that in 2010 alone tax expenditures cost the
government more than $1 trillion -- more than Medicaid and
Medicare combined.

Cutting Expenditures

These tax expenditures have emerged as the central sticking
point in budget negotiations. Democrats want new revenues to be
part of the deal, but because Republicans adamantly oppose
raising marginal tax rates, Democrats have instead proposed
cutting expenditures by about $1 trillion. They thought that
would be more palatable to Republicans, but thus far, they’ve
been wrong: Republicans say that increases in revenues are
increases in taxes. It doesn’t matter whether the money comes
from closing loopholes or raising rates.

Some of their brightest policy lights, however, disagree.
Former Federal Reserve Chairman Alan Greenspan says that tax
expenditures are “misclassified” because they are identical to
outlays. Gregory Mankiw, who led President George W. Bush’s
Council of Economic Advisers, calls expenditures “stealth
spending implemented through the tax code.” You can’t find a
serious economist on God’s green earth who thinks the economy
differentiates between cutting a government program that
subsidizes health insurance and cutting an equally large tax
break that subsidizes the purchase of health insurance.

Democrats Oppose Spending

The crude budget calculus that counts every dollar in
spending cuts as a win for Republicans and every dollar in
revenue increases as a win for Democrats is simply wrong. There
are tax expenditures that Democrats aggressively protect -- like
the Earned Income Tax Credit, which provides a huge lift to low-
income Americans. And there are spending programs that many
Democrats oppose, including quite a few run out of the Pentagon.

On average, tax expenditures are regressive. So if you’re
cutting them across-the-board, you’re raising taxes in a
relatively, though not exclusively, progressive way. Yet
partisan negotiators in Washington aren’t likely to cut either
tax expenditures or taxes across-the-board. They will start with
vague targets and eventually advance specific cuts and reforms.
And that’s when we’ll know how much of the deal should be
counted as spending cuts and how much as tax increases -- and
whether, in the final analysis, that distinction even matters.

(Ezra Klein is a Bloomberg View columnist. The opinions
expressed are his own.)

To contact the writer on this article:
Ezra Klein in Washington at
wonkbook@gmail.com